UK banks need more money

U.K. banks must come up with £25 billion ($38 billion) in fresh capital this year, the Bank of England warned Wednesday, piling pressure on partly state-owned banks Royal Bank of Scotland Group PLC and Lloyds Banking Group PLC to step up the pace of asset sales.

The Bank of England’s Financial Policy Committee said banks’ capital buffers need to be higher to withstand the effects of the weak domestic economy and euro-zone crisis. Gov. Mervyn King, a member of the FPC, said the shortfall isn’t “an immediate threat to the banking system and the problem is perfectly manageable.”

Analysts said the £25 billion figure is roughly what they had expected since the FPC in November said banks might be underestimating their potential losses on U.K. commercial real estate and loans to borrowers in weakened euro-zone countries such as Ireland and Spain.

How the capital will be raised wasn’t immediately clear. Bank of England Deputy Gov. Andrew Bailey, who also sits on the FPC, said around half of the £25 billion is already in banks’ plans for the year. The most common ways for lenders to improve their capital positions are to issue new shares, retain earnings or reduce their overall assets.

The New York Times story had good context and a comparison to the U.S. banking sector at the top of its story, information that many shareholders are likely searching for at this point.

The announcement follows a five-month inquiry by British officials into the financial strength of the country’s banking industry. With the world’s largest financial institutions facing new stringent capital requirements, the Bank of England had been concerned that local firms did not have large enough capital reserves to offset instability in the world’s financial industry.

Earlier this month, the Federal Reserve also released the results of so-called stress tests of America’s largest banks, which indicated that most big banks had sufficient capital to survive a severe recession and major downturn in financial markets. Citigroup and Bank of America, after disappointing performance the previous year, now appeared to be among the strongest.

British banks are not so lucky.

The reported released on Wednesday said that local banks had overstated their capital reserves by a combined £50 billion, which authorities said would now be adjusted on the firm’s balance sheets. Many of the country’s banks already have enough money to handle the accounting adjustment, the report said on Wednesday.

Bloomberg’s story did mention that the capital shortfall wouldn’t require more government investment in the banks, which should put some minds at ease.

BOE Governor Mervyn King said the shortfall “is not an immediate threat to the banking system and the problem is perfectly manageable.” He also said the recommendations won’t require additional government investment in banks.

Lenders will have to reach a common equity tier 1 capital ratio of 7 percent of risk-weighted assets by the end of 2013. While some banks already exceed this level, those that don’t will have to boost capital or restructure their balance sheets without hindering lending to the economy, the BOE said.

“It’s a relatively low bar,” said Cormac Leech, a banking analyst at Liberum Capital Ltd. in London. “They’re saying that the banks will continue to build capital to comply with that metric, so it doesn’t sound like there’s a massive pressure on the banks to exceed Basel III requirements.”

It’s clear that the world’s banks are still reeling from bad loans and struggling to maintain capital ratios up to the new standards. Here’s hoping they can figure it out and raise the money from the private market. I doubt that public sentiment anywhere in the world would support another bank bailout.